We expect RBI to turn dovish; rate cuts would depend on the trajectory of inflation which seems under control for now
Small and midcap space offer opportunities in pockets where earnings visibility is resurfacing and quality of management is strong. These themes are likely to do well in 2019, Vinay Khattar, Head, Edelweiss Investment Research, said in an interview with Moneycontrol’s Kshitij Anand.
Edited excerpt:
Q) We ended 2018 on a stable note with Sensex rising by about 6% while Nifty50 rose a little over 3%. What is your outlook for 2019?
A) We expect H1 of FY19 to remain volatile on back of uncertainty regarding General elections, Budget for FY20 and a synchronous slowdown in global growth. However, the second half could see a much more benign environment as economic growth recovers from the short-term drags.
Q) It looks like the government will doll out certain populist measures ahead of the polls to set the stage for the big day. Do you see this as a concern for D-Street?
A) There have been a number of farm loan waivers announced. The revenue expenditure generally rises ahead of each election. We expect some populist measures to be announced in the next few months.
Large farm loan waivers, especially if enacted by the central government could be negative for markets. Currently, the total agriculture and allied activities outstanding credit for scheduled commercial banks is nearly Rs 10 trn and another Rs 2 trn is with the state cooperative banks.
There could be a large fiscal drag is a sizeable portion of these loans is waived. We are attentive to these announcements are numbers.
Q) Where us rupee likely to move in 2019 and what are the factors which one should watch out for?
A) Indian Rupee is likely to face pressure from global markets as the Indian fiscal situation remains under pressure and external situations is also relatively weaker.
The big crash in oil prices have supported the Indian currency and removed the possibility of a large depreciation. However, core inflationary pressures, expansionary fiscal policy could keep Indian Rupee under pressure.
India REER at ~114 is slightly elevated at present. We expect Indian Rupee to trade towards 74 as we progress into 2019.
Q) The broader market remained under pressure in 2018. After the recent correction, do you think much of the froth is out and investors can again look at the mid and the small-caps in the year 2019?
A) Well, Small and midcap space offer opportunities in pockets where earnings visibility is resurfacing and quality of management is high. These themes are likely to do well in 2019.
Q) Top five stocks you think are good buying ideas with a target price for the year 2019?
A) Here is a list of top 5 stocks for the year 2019:
JK Paper (Mcap INR Cr 2,810)
JKP reported record high ROCE (at 18.1%) in FY18 mainly due to reducing competition intensity from global players as a result of a) high global pulp prices vs weak domestic wood prices, and b) weak rupee environment.
As a result of high global pulp prices and a weak rupee, India has become a net exporter of uncoated paper (which accounts for 64% of JKP revenue) from Dec 2017 onwards.
We believe JKP would be clear beneficiary over the medium-term as it has the best debt protection metrics in the past 16 years (net debt/EBITDA at 1.70x in FY18) and has nil dependency on imported hardwood pulp for its paper manufacturing operations.
As a result, the company has already increased paper capacity from 436 ktpa to 609 ktpa and plans to increase it to 750-800 ktpa by Mar 2021.vJKP is currently trading at 4.3x of FY20 EBIDTA estimates, which is near to its trough valuation based on the past 12-years data.
KNR Constructions (Mcap INR Cr 2,746)
KNR has Rs 6,000 cr of the order book and that offers more than 3 years of revenue visibility. Among that, Rs 4,000 cr come from its own 5 HAM projects where work is expected to start over the next two months.
KNR is the first company to get financial closure of its 5 new HAM projects due to its history of delivery and nimble balance sheet. The company is also at the final level discussion to sell at least 50% stake in those HAM projects which will reduce the equity commitment.
The company has only Rs 240 cr of debt at the balance sheet and among that Rs 220 cr is given by promoter family and hence the company has very limited exposure to the external debt which offers comfort in such a tough time. The stock is trading at 11x FY19 and 9x FY20E.
PSP Projects: (Mcap INR Cr 1,367)
With Rs 2,700 crore of order book, PSP has almost three years of revenue visibility and the company has already added Rs 800 crore to the order book and management is confident of crossing INR 1,200 cr of order inflow in FY19.
Strong execution of Surat Diamond Bourses over FY19 and FY20 will drive the revenue growth going forward. After reporting 65% topline growth in FY18, PSP is expected to report 50% topline growth in FY19E and revenue is expected to grow at 33% rate in FY20E.
The EBITDA margin is expected to maintain at 13.5-14% range over the next two years. The company has zore net debt and RoCE of 30% is highest in the sector. At CMP, the stock is trading at 14x of FY19E and 10x of FY20E.
Ujjivan Financial Services (Mcap INR Cr 2,975)
Ujjivan Financial Services Ltd. (UFS) is an NBFC-MFI turned Small Finance Bank (SFB) with AUM of INR 8,317crs as on Q2FY19. The company operates with 462 branches comprising of 367 banking outlets and 95 asset centres.
UFS has forayed into new segments like Personal Loans, Two-wheeler Loans, Rural Business and lending to NBFC which enhances loans growth. Non-MFI contributes 12 percent of the total loans book and registered 252 percent YoY growth in Q2FY19Q to Rs 1,002crs,
The asset quality of the company has improved significantly post demonetisation period. The gross NPL improved to 1.9% in Q2FY19 as against 2.7% in Q1FY19. Net NPL and PAR>0 remained flat sequentially at 0.3% and 3.3% respectively.
Deepak Nitrite (DEN): (Mcap INR Cr 3,257)
Deepak Nitrite is one of the prominent chemicals players in India with manufacturing across basic chemicals (toluene and nitrite chemicals), specialty chemicals (Xylidines, Oximes, Cumidines etc.) and performance products (Optical brightening agents-OBA using DASDA).
While revenues of the company have grown at a 5-year CAGR of 10% to INR 1651 cr in FY18, profits have grown by 16% CAGR during the same period to INR 79 crore in FY18.
Further, regular supply of feedstocks and sufficient demand are key underlying for our investment hypothesis. However, with sufficient cushioning in our near as well as medium-term estimates, we think the company is at reasonable valuations with strong delivery potential.
Q) What is the mood of FIIs… do you think the recent friction between the govt and the RBI will lead to some loss of credibility and weigh on sentiment?
A) FII selling has abated over the last two months. However, we haven’t witnessed large inflows from FII even with Oil prices crashing and bond rallying. FII flows are important for India’s BOP. The global liquidity condition is tight and we expect it to keep FII flows tepid for now.
Q) Is market pricing in Modi's return to power in 2019? If not, then in case Congress come or we have a coalition government, do you think we could see more pressure?
A) Indian economy and markets are resilient and we expect long-term Indian growth to remain intact under all governments.
Q) What are your targets for Sensex or Nifty and why?
A) We continue to expect Nifty to be under a range for H1 and probably move towards its recent highs in H2 2019.
Q) Do you see RBI moving to a more dovish stance and a rate cut in 2019?
A) Given the current easing in liquidity conditions, we expect RBI to turn dovish. Rate cuts would depend on the trajectory of inflation which seems under control for now. There could be more emphasis on liquidity management until the MPC meets in Feb’19 when a rate cut could be a possibility.
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